Prior to the introduction of the statutory duties in the Companies Act 2006 (“CA 2006”), directors’ duties were based in common law, meaning they were evolved and developed by the courts through case law.
The common law duties imposed on all directors generally comprised fiduciary duties and a duty to exercise care and skill.
Fiduciary duties are owed when it is agreed that one person will act for or on behalf of another in circumstances which give rise to a relationship of trust and confidence – including by directors to their companies.
Fiduciary duties included the following –
- the duty to act in good faith in the best interests of the company
- to avoid a situation of conflict with the company and not to compete with the company
- not to make a secret profit
- to exercise the director’s powers for a proper purpose and not to allow discretion to be fettered
- a duty to take proper care of the assets of the company
- to use the powers granted to them for the purposes for which they were conferred
Care and skill
Through the development of common law, directors had a duty to exercise care and skill. The basic test for this was that directors had to exercise such degree of skill and diligence as would amount to the reasonable care, which an ordinary man might be expected to take, in similar circumstances, if the business were their own. However, directors did not need to perform their duties to a greater degree of skill than may reasonably be expected from a person of their particular knowledge and experience. At this time, the standard was subjective in nature.
Many of the common law duties owed by directors were later codified by the CA 2006. The duties that remained uncodified are, however, still relevant such as the duty of confidentiality and the duty to consider and act in the interests of creditors.
The CA 2006 provides that the statutory duties contained within are to be interpreted and applied in the same way as the former common law rules and principles. There is, therefore, an ongoing requirement for directors to consider the former common law rules and any development to the common law as it continues to be developed by the courts going forward which will be relevant in interpreting and applying the general duties contained in the CA 2006.
Look out for the next blog in this series, which will consider the Companies Act 2006 codified regime and the consequences of any breach of duty
If you would like further information regarding the topics discussed in this blog, please contact:
Calum Crighton: firstname.lastname@example.org / 01224 011687
Kim Anderson: email@example.com / 01224 011694